Mercury Investor Roadshow WILLIAM MEEK Chief Financial Officer November 28 TIM THOMPSON Head of Treasury & Investor Relations
DISCLAIMER This presentation has been prepared by Mercury NZ Limited and its group of companies ( Company ) for informational purposes. This disclaimer applies to this document and the verbal or written comments of any person presenting it. Information in this presentation has been prepared by the Company with due care and attention. However, neither the Company nor any of its directors, employees, shareholders nor any other person gives any warranties or representations (express or implied) as to the accuracy or completeness of this information. To the maximum extent permitted by law, none of the Company, its directors, employees, shareholders or any other person shall have any liability whatsoever to any person for any loss (including, without limitation, arising from any fault or negligence) arising from this presentation or any information supplied in connection with it. This presentation may contain projections or forward-looking statements regarding a variety of items. Such projections or forward-looking statements are based on current expectations, estimates and assumptions and are subject to a number of risks, and uncertainties, including material adverse events, significant one-off expenses and other unforeseeable circumstances, such as, without limitation, hydrological conditions. There is no assurance that results contemplated in any of these projections and forward-looking statements will be realised, nor is there any assurance that the expectations, estimates and assumptions underpinning those projections or forward looking statements are reasonable. Actual results may differ materially from those projected in this presentation. No person is under any obligation to update this presentation at any time after its release or to provide you with further information about the Company. A number of non-gaap financial measures are used in this presentation. You should not consider any of these in isolation from, or as a substitute for, the information provided in the audited consolidated financial statements, which are available at www.mercury.co.nz. The information in this presentation is of a general nature and does not constitute financial product advice, investment advice or any recommendation. The presentation does not constitute an offer to sell, or a solicitation of an offer to buy, any security and may not be relied upon in connection with the purchase or sale of any security. Nothing in this presentation constitutes legal, financial, tax or other advice. 2 DISCLAIMER
COUNTRY, INDUSTRY & COMPANY Stable regulatory framework > Underpinned by strong industry performance on Reliability, Renewability and Pricing (the electricity trifecta ) > Electricity recognised as a key enabler for New Zealand s low-carbon economy Focus on customer loyalty > Focus on rewarding our existing customers resulting in increased loyalty and belowmarket churn % renewable generation > Low variable cost generation delivering strong and stable cash flows > Location and type of Mercury s assets is a competitive advantage Delivering long-term shareholder value > years of ordinary dividend growth > Well positioned to deliver on growth opportunities when timing is right 3 MERCURY AT A GLANCE
MERCURY AT A GLANCE 6,8GWh ANNUAL GENERATION Vertically integrated % renewable generator and retailer 9.99% SHAREHOLDING IN TILT 343K NORTH ISLAND CUSTOMERS 6% HYDRO 4% GEOTHERMAL Key Information Ticker Codes: MCY.NZ / MCY.AX Market Capitalisation: NZ$4.6 billion Enterprise Value: NZ$5.8 billion Average Daily Turnover: NZ$4.5 million Credit Rating: BBB+/Stable (S&P) EBITDAF (FY9f): NZ$55 million Cash Dividend Yield: 4.4% Gross Dividend Yield: 6.2% 2 PE ratio: 2.x 3 43K SOUTH ISLAND CUSTOMERS NO. 2 METER DATA & SERVICES PROVIDER IN NZ 4 MERCURY AT A GLANCE As at, or in the 2 months to, 3 October 28 2 Fully imputed for New Zealand residents to 28% 3 Reflects high accounting depreciation due to policy of carrying generation assets at fair value
MERCURY S COMPETITIVE ADVANTAGE % renewable generation > Two low-cost complementary fuel sources in base-load geothermal and peaking hydro Superior asset location > North Island generation located near major load centres; rain-fed hydro catchment inflows aligned with winter peak demand Substantial peaking capacity > The Waikato hydro system is the largest group of peaking stations in the North Island High performance teams > Dynamic company culture built on the understanding that our people set us apart Track record of customer engagement > Brand capital built through customer-led innovation and rewarding loyalty Long-term commercial partnerships > With Māori landowners and other key stakeholders 5 MERCURY AT A GLANCE
29 2 2 22 23 24 25 26 27 28 29 29 2 2 22 23 24 25 26 27 28 29 29 2 2 22 23 24 25 26 27 28 29 GWh $m 29 2 2 22 23 24 25 26 27 28 29 29 2 2 22 23 24 25 26 27 28 29 29 2 2 22 23 24 25 26 27 28 29 $m $m $m MERCURY S FINANCIAL TRACK RECORD EBITDAF 6 CAGR: ~3% OPEX Operating expenditure One-off costs 6 DISTRIBUTIONS Interim dividend Final dividend 6 Special dividend Share buyback 4 4 Flat from FY24 4 years of ordinary dividend growth 2 2 2 Financial Year GENERATION VS SALES, Geo Hydro Thermal Financial Year CAPEX Stay-In-Business 5 Generation development Growth DEBT/EBITDAF 4x Financial Year DEBT/EBITDAF 5, -5, 4 3 2 3x 2x Capacity for growth -, x Financial Year Financial Year Financial Year 6 MERCURY AT A GLANCE
NEW ZEALAND S COMPETITIVE ADVANTAGE IN ELECTRICITY > All electricity markets seek to balance Reliability, Pricing and Renewability the Electricity Trilemma > New Zealand has achieved the electricity Trifecta : > Opportunity exists in New Zealand to broaden this advantage to reduce reliance on imported fossil fuels 7 INDUSTRY Source: Accenture, Ministry of Business, Innovation & Employment, United States Chamber of Commerce
INTERNATIONAL ENERGY AGENCY It is a world leading example of a well-functioning energy market, which continues to work effectively. The country is endowed with a diverse range of energy sources, notably renewables. Among IEA member countries, New Zealand has the highest penetration of geothermal energy and a significant contribution from hydro. Without any direct subsidies or public support, their share in electricity and heat supply has grown in recent years, as a result of cost-competitive geothermal and hydro and very good conditions for wind power. This performance is a world-class success story among IEA member countries. Kawerau Geothermal Power Station 8 INDUSTRY IEA Publications (27), Energy Policies of IEA Countries: New Zealand 27 Review, International Energy Agency, p. 3
TWh TWh CONTRAST TO AUSTRALIA S ELECTRICITY TRILEMMA Reliability > Coal plant retirements and growing intermittent generation have reduced system stability > With increasing growth in variable renewable energy resources, both demand and supply are now exposed to the vagaries of weather impacting AEMO s ability to meet demand on extreme peak days Pricing > Wholesale and retail price increases driven by thermal retirement and gas price linkage to international LNG market > there is a severe electricity affordability problem across the NEM putting Australian business and consumers under unacceptable pressure 2 Renewability > Renewable generation contribution of 5% > Policy uncertainty has created challenging conditions for investment in generation NEW ZEALAND S GENERATION MIX 5 Hydro Geothermal Wind Coal Gas Other Solar 4 3 2 3 25 2 5 5 99 99 993 993 996 996 999 AUSTRALIA S GENERATION MIX 999 22 Hydro Wind Coal Gas Other Solar 22 25 25 28 28 2 2 24 24 27 27 9 INDUSTRY Source: Ministry of Business, Innovation & Employment, Australian Government - Department of Industry, Innovation and Science Australian Energy Market Operator (AEMO), (28), AEMO observations: Operational and market challenges to reliability and security in the NEM, AEMO Limited, p. 72 2 Australian Competition and Consumer Commission (ACCC), (28), Retail Electricity Pricing Inquiry preliminary report, ACCC, p. 5
STABLE REGULATORY FRAMEWORK Celebrating 2 years of the market delivering reliability, renewability and choice for customers > Electricity sector fully deregulated in the 99s with introduction of competitive wholesale and retail markets > Generation investment entirely market-led with no payments for reserve capacity (energy-only wholesale market) > Full retail competition with low barriers to entry > Competitive segments (generation and retail) subject to independent regulatory oversight from the Electricity Authority > Bipartisan support for a low-carbon economy enabled by New Zealand s electricity advantage > Electricity Price Review (EPR) underway as part of coalition agreement following September 27 general election > EPR focus on incremental changes designed to improve customer access, affordability and energy literacy > NZ Emissions Trading Scheme (ETS) places increased cost on emitting generation sources > Emission units trading at ~NZ$25/t (equivalent to ~$/MWh for a CCGT post removal of transitional arrangements by 29 ) INDUSTRY Transitioning from unit for 2 tonnes of CO 2 to unit for tonne of CO 2
Nominal c/kwh Annualised Churn (%) EBITDAF ($b) TWh GW LONG-TERM INDUSTRY TRENDS SECTOR EARNINGS 3 CAGR: 3.3% 2 28 29 2 2 22 23 24 25 26 27 28 Financial Year RESIDENTIAL PRICE Lines Energy Wholesale 2mth rolling) 2 5 CAGR: 2.7% CAGR: 4.6% 5 28 29 2 2 22 23 24 25 26 27 28 Financial Year DEMAND Series Series2 5 4 3 2 8.5 29 2 2 22 23 24 25 26 27 28 Financial Year CHURN Total Churn Trader Churn 25% 2% 5% % 5% % 28 29 2 2 22 23 24 25 26 27 28 Financial Year. 9.5 9. INDUSTRY Source: Company reports, TPIX, MBIE, Pricing Manager (NZX), Electricity Authority Includes premise churn switches caused by customers moving house
Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Monthly EV Registrations Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Monthly Solar PV Installations EMERGING TECHNOLOGY IN NEW ZEALAND CONTEXT Solar > Still a niche in the NZ electricity market > m solar panels is equivalent to ~% of national demand > Solar generation is not well matched to NZ s demand profile which peaks in winter evenings > Given rapid changes in electricity-generation technology and potential effects of rising electricity prices on adoption of lowemissions technology in other parts of the economy, the Government should not use subsidies or regulation to favour particular technologies that generate low-emissions electricity Batteries > Useful when coupled to solar but at significant additional cost > Lake Taupo storage equivalent to 4m 4kWh Tesla Powerwalls Electric Vehicles (EVs) > New Zealand s largest green growth opportunity > Renewable electricity advantage well suited to transport electrification SOLAR PV INSTALLATIONS 5 4 3 2 6 5 4 3 2 Solar Installations 2mth Rolling Installations (RHS) 5, 4, 3, 2,, ELECTRIC VEHICLE REGISTRATIONS Total EVs 2mth Rolling Registrations (RHS) Total EV Fleet Size (RHS), 8, 6, 4, 2, 2 INDUSTRY New Zealand Productivity Commission, (28), Low-emissions economy: Final report, p. 4. Available from www.productivity.govt.nz/low-emissions
TWh 22 23 24 25 26 27 28 29 2 2 22 23 24 25 26 27 28 TWh UNDERLYING DRIVERS FOR FUTURE DEMAND GROWTH > Electricity demand has been flat for a decade > Signs of demand growth are re-emerging > Urban, rural and dairy segments continue to grow > NZ Aluminium Smelter (NZAS) is re-commissioning its 4 th potline (~% of national demand) > Supportive drivers of demand growth include: > High net migration > GDP per capita growth > Adverse drivers of demand growth include: > Reductions in per household consumption due to efficiency > Medium-term trend of de-industrialisation > Transition from fossil fuels to electricity and other low-emissions fuels identified as one of three significant changes that must occur to achieve lowemissions goals 2 ANNUAL ELECTRICITY DEMAND 42 4 38 36 34 TEMPERATURE ADJUSTED SEGMENT ELECTRICITY DEMAND 4 FY23 FY24 FY25 2 FY26 FY27 FY28 8 6 4 2 Financial Year Annual Growth Rate (RHS) Consumption (LHS) Urban Rural Dairy Tiwai Industrial Irrigation 4 3 2 - -2-3 % 3 INDUSTRY Normalised for temperature 2 Low-emissions economy: Final report. Available from www.productivity.govt.nz/low-emissions
Jul-2 Jan-3 Jul-3 Jan-4 Jul-4 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-2 Jul-2 Jan-2 Jul-2 Jan-22 Jul-22 Auckland Price ($/MWh) DYNAMIC WHOLESALE MARKET > Wholesale spot prices reflect near term supply and demand conditions including hydrology > Futures pricing tends to Long Run Marginal Cost (LRMC) of new generation in a growing market ELECTRICITY PRICES Wholesale Price Futures Price $32 $28 $24 $2 $6 $2 $8 $4 Above average hydrology dampens price volatility 55MW thermal capacity retired Higher spot prices due to gas supply constraint $ 4 MARKET DYNAMICS As at 3 October 28
5 MERCURY
LEVERS FOR GROWTH Tighter supply and demand > Upward pressure on end-user pricing due to supply and demand balance tightening Investment in core business > Wind options Turitea (26MW) & Puketoi (3MW) remain ready for multi-stage development at the right time > Current geothermal reservoirs may support further development > Market consolidation options available but challenging Home and beyond > 9.99% stake in Tilt Renewables (TLT.NZ) complements NZ wind options and provides opportunity to participate in Australian renewables transition > Global strategic review confirmed focus on our core markets and opportunities within the home and e-mobility Snowtown Wind Farm Tilt Renewables 6 MERCURY
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Inflows (GWh) Load (GWh) Inflows (GWh) Load (GWh) MERCURY S HYDRO ADVANTAGE > Positive correlation of North Island hydro inflows and sales > Inflows into Mercury s North Island hydro catchment peak in winter to match peak winter demand > Complemented by non-weather-dependent baseload geothermal AVERAGE SOUTH ISLAND INFLOWS VS DEMAND AVERAGE NORTH ISLAND INFLOWS VS DEMAND Average Inflows in SI (LHS) Average Market Demand (RHS) Average Inflows in NI (LHS) Average Market Demand (RHS) 8 2 3 2 7 6 5 25 2 4 9 5 9 3 2 Inflows from summer snow melt inversely correlated to demand 8 7 5 Inflows from winter rain correlated to demand 8 7 6 6 7 MERCURY
OTA Wholesale Price ($/MWh) OTA Wholesale Price ($/MWh) MERCURY S HYDRO ADVANTAGE $3 $25 > Large South Island (SI) hydro catchments and associated hydrology drives wholesale prices > High South Island hydro storage will result in low wholesale prices (and vice versa) > Mercury s North Island (NI) hydro catchment has low correlation to wholesale prices > High Mercury hydro storage can occur with high wholesale prices (and low storage with low wholesale prices) SI MONTHLY HYDRO STORAGE AND PRICE ~45% of annual national generation 83% of total hydro energy storage 72% of annual national inflows Jan 999 to Jun 26 FY27 FY28 NI MONTHLY HYDRO STORAGE AND PRICE $3 $25 ~5% of annual national generation 7% of total hydro energy storage 28% of annual national inflows Jan 999 to Jun 26 FY27 FY28 $2 $5 $2 $5 Mercury can benefit from high prices and high volumes $ $ $5 $5 $ -5 - -5 5 5 Delta to SI Storage Average (GWh) $ -4-2 2 4 Delta to NI Storage Average (GWh) 8 MERCURY Graphs Source: NZX Hydro, Pricing Manager (NZX), Mercury
Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Jul-6 Oct-6 Jan-7 Apr-7 Jul-7 Oct-7 Jan-8 Apr-8 Jul-8 Switches Switches Annual Churn FOCUS ON LOYALTY IN A HIGHLY COMPETITIVE RETAIL MARKET NATIONAL SWITCHING, 8, 6, 4, 2, -2, -4, -6, -8, -, 3% 2% % % Withdrawn > In a highly competitive retail market, Mercury is focused on promoting and rewarding customer loyalty > Mercury Brand churn rate significantly below market > Churn rate of other brands reflects behaviour of targeted customers Mercury Group Mercury Brand Prior 2mth Mercury Switches Net Switches NATIONAL CHURN RATE (2mth rolling) 25% 2% 5% % 5% % } } All Retailers Mercury Mercury Brand All switches Trader switches 2 9 MERCURY Source: Electricity Authority, EMI Market share trends and switching breakdown Switches which were initiated but not completed (inclusive of saves) 2 A trader switch is where a customer changes retailer without changing house
FOCUS ON CUSTOMER LOYALTY The number of customers enjoying unique Mercury rewards continues to grow: > 55, Airpoints customers (45% of Mercury brand) > 23, on Fixed-Term contracts (36% of Mercury brand) > GEM, our usage monitor, is one of our most popular services with ~, customers engaging every week > 94,5 customers enjoyed a Free Power Day in FY28 > Growing customer engagement capability through new digital channels and features 2 MERCURY As at 3 June 28
STABLE CAPITAL STRUCTURE > BBB+ rating is key reference point for dividend policy and an efficient and sustainable capital structure > S&P re-affirmed Mercury s credit rating of BBB+/stable on December 27 > One-notch upgrade given majority Crown ownership > Capital structure prudently managed > Targeting gearing at low end of Debt / EBITDAF between 2.2x and 3.x (within key ratio for stand-alone S&P credit rating BBB) to provide debt headroom due to Government minimum equity ownership requirement > Gearing range reflects flexibility afforded by Treasury stock retained from share buyback (37.7m shares) > Debt / EBITDAF 2.x at 3 June 28 (2.3x after EBITDAF normalisation for above-average hydro generation) 3 June 28 3 June 27 3 June 26 3 June 25 3 June 24 Net debt ($m),249,38,68,82,3 Gearing ratio (%) 27.5 23.9 24.4 24.5 24.3 Debt/EBITDAF (x) 2..8 2. 2. 2. Capital management priority Growth Capital returns 2 MERCURY Adjusted for S&P treatment of Mercury s Capital Bond
22 APPENDIX Karapiro Hydro Power Station
NEW ZEALAND OVERVIEW Key Facts Credit Rating: AA/stable Population: 4.9 million GDP: NZ$289 billion (or US$88 billion) 2 Official Cash Rate (OCR):.75% yr Interest Rate: 2.8% > Stable political environment > Mixed Member Proportional (MMP) system > Two main parties National (centre-right) and Labour (centre-left) > Labour-led coalition government since October 27 (3-year term) > Robust GDP growth achieved over recent years (currently 2.7% 2 ), with below-trend unemployment (currently 3.9% ) 23 APPENDIX As at 3 October 28 2 As at 3 June 28
NEW ZEALAND ELECTRICITY MARKET STRUCTURE SINCE 998 RETAILERS AND WE OPERATE WE OPERATE 4 4 CONSUMERS HERE HERE > Retail prices determined by competition (unregulated) > >4 retailer brands buy from wholesale market and on-sell to nearly 2 million consumers > Electricity Authority responsible for promoting competition, efficiency and reliability of supply for long-term benefit of consumers > NZAS (aluminium smelter) 3% of national demand > 2 major metering companies, including Mercury trading as Metrix, with high national smart meter penetration 2 DISTRIBUTION AND 3 THE NATIONAL GRID NETWORK OWNERS > Transpower (Government owned) is > Regulated monopolies regulated owner and operator > 29 distribution companies > 5,km of overhead and underground networks 2 3 > Transports high voltage electricity to networks and large industrial users >,2MW HVDC link between South and North Islands GENERATORS > Wholesale prices determined by competition > Generate electricity and sell to wholesale market > 5 major generators producing about 95% of NZ s electricity > 8% renewable electricity (unsubsidised) > Solar installed in 2, or % of total customer connections 24 APPENDIX
GWh MERCURY S COMPLEMENTARY GENERATION SOURCES > % renewable generation with two complementary low-cost fuel sources > High up-front build cost, low operating cost > Central North Island close to major load centres and not dependent on inter-island connection (HVDC) > Generation-Weighted Average Price (GWAP) favourable to peers reflecting the flexibility and location of assets > Flexible hydro generation (,64MW / 4,GWh) > Largest group of peaking stations in North Island > Baseload geothermal generation (337MW / 2,8GWh) > Only renewable not dependent on weather > Average net long position reflecting integrated portfolio > Movement in net position year-on-year due to hydrology, plant availability and value of sales FY28 NET POSITION BREAKDOWN 8, 7, 6, 5, 4, 3, 2,, Net CFD Sales FPVV Losses 2 Commercial FPVV Residential FPVV Additional Hydro Average Hydro Geothermal (Consolidated) 3 3 Long Short 25 APPENDIX Equity share 2 Contract-For-Difference 3 Fixed-Price Variable Volume
OWNERSHIP > Listed on NZX and ASX in May 23 > ~85, shareholders (widest-held New Zealand register) > Government majority ownership > Public Finance Act and Company s constitution require at least 5% Crown ownership > No other person may hold more than % of shares > Eight independent Directors > No direct government representation on Board MERCURY SHARE REGISTER 8% 3% 4% 5% 24% Government New Zealand Retail International Institutions New Zealand Institutions Treasury Stock 26 APPENDIX As at October 28
SUPPLEMENTARY DIVIDEND TO NON-RESIDENTS > Reduces or eliminates the economic impact of Non-Resident Withholding Taxes > For illustrative purposes see below worked example for a corporate investor. This should not be interpreted as tax advice NZ investor Foreign investor No Supplementary dividend Supplementary dividend Gross dividend... Imputation credits (28.) (28.) (28.) Supplementary dividend - - 2.7 72. 72. 84.7 Less: Corporation tax (@28%) (28.) - - Add: Imputation credits 28. - - Less: Non-resident withholding tax (@5% of dividend where DTA ) - (.8) (2.7) Cash dividend 72. 6.2 72. 27 APPENDIX Includes United Kingdom, United States, Japan & Hong Kong
REFERENCE MATERIAL MERCURY REFERENCES Mercury Investor Centre Governance Presentation December 27 FY28 Results Presentation August 28 Mercury Electricity Price Review Submission www.mercury.co.nz/investor-centre http://issuu.com/mercurynz/docs/governance_roadshow_presentation_de?e=2555484/5638686 https://issuu.com/mercurynz/docs/2882_mercury_financial_results?e=2555484/63952632 INDUSTRY REFERENCES Electricity Authority website System Operator website Wholesale electricity spot prices Electricity futures prices www.ea.govt.nz https://www.transpower.co.nz/system-operator www.em6live.co.nz www.asx.com.au/products/energy-derivatives/new-zealand-electricity.htm INDUSTRY PUBLICATIONS Energy Policies of IEA Countries New Zealand 27 Review Ministry of Business, Innovation and Employment Energy in New Zealand Electricity Authority - Electricity in New Zealand https://www.mbie.govt.nz/info-services/sectors-industries/energy/electricity-pricereview/submissions/copy_of_submissions-received-epr/electricity-price-review-submissions-7.pdf https://www.iea.org/publications/freepublications/publication/energy-policies-of-iea-countries---new-zealand-27- review.html www.mbie.govt.nz/info-services/sectors-industries/energy/energy-data-modelling/publications/energy-in-new-zealand www.ea.govt.nz/about-us/media-and-publications/electricity-nz 28 APPENDIX
FOR FURTHER INFORMATION > TIM THOMPSON HEAD OF TREASURY & INVESTOR RELATIONS T. +64 275 73 47 E. INVESTOR@MERCURY.CO.NZ